A colleague who holds a senior position in a technology company recently asked me about innovation. Specifically, his question was “How do I foster innovation internally, rather than through acquisitions?” Since this is an important question for many business leaders, I thought I’d share some of my experiences with a broader audience. In my view, creating and maintaining a culture of innovation is essential for companies to stay competitive, to grow their businesses, and to keep employees engaged. Being good at it requires commitment across the organization, a willingness to experiment (and fail), and the courage to take a hard look at places where barriers to innovation exist.

In this note, I define innovation broadly, as ideas leading to significant improvements in products, services, technologies, processes, or business models. Companies and organizations typically succeed by doing one thing exceptionally well, whether it is delivering consistently high-quality food, while managing cost; or delivering high-quality code on time and on budget. Unfortunately, the heads-down focus that is necessary to achieve this is not always conducive to the behaviors that are needed for innovation.

Even companies that grew out of an innovative idea and a “start-up” mentality can stagnate as they grow and mature. It’s even more difficult to create and maintain a culture of innovation in large companies that have an internal culture that has traditionally valued other things. A focus on meeting targets can lead to risk aversion. In large companies, there are often strict divisions of responsibility and heavy-weight processes for coordination among groups that create an inherent barrier to innovation. And, leadership is often impatient. It’s important for them to understand that any significant change will take time.

Other barriers to innovation include factors like management attention and attitudes, the way resources and funding are allocated, incentive systems, employee engagement and expertise, etc. In many organizations that are struggling with innovation, the staff at the working level are not the root cause of the problem. They have ideas and want to contribute, but may not have been given the opportunity. This is why management attention and resources also need to be addressed.

Framing the Problem

The first step is to determine what kind of innovation is needed in your company. For an innovation to be successful, it needs to be aligned with the broad business strategy, address your customer’s needs, convey a competitive advantage in the market, consider the capabilities needed to execute, and deliver value to the business, such as revenue growth or customer retention. These are issues that are best addressed by leadership, given that they have the broadest perspective on the business, though I find it can be very useful to get input on overall direction from working level staff as well.

Once leadership has set a direction, the next step in creating a culture of innovation is communication. Leadership needs to clearly and consistently communicate what it wants to achieve throughout the organization, and back up this message with action. Leadership may have some very specific goals in mind, may simply want to stimulate more internal innovation, or a combination of both. For this discussion, let’s break it down in two possible objectives: directed (or focused) innovation, and bottom-up innovation.

Directed innovation is focused on specific problem domains where leadership knows it needs to be innovating. Bottom-up innovation is more open-ended, and relies on a culture that encourages people to recognize needs, and to propose / create solutions to their needs. These are not mutually exclusive. For example, one of your employees may tell you it’s important to be innovating on X. This can lead to a directed innovation work stream on X.

Let’s start with directed innovation. The traditional approach would be to simply appoint someone to be responsible for the area, then allocate staff and a budget. But good ideas can come from anywhere; sometimes from places you’d least expect. How do you get the entire organization to own a problem and contribute ideas and solutions? In a small organization, you’d engage everyone directly. You might pull together a brainstorming session, frame the question, board all of the ideas that come out of the discussion, and then vet them to identify the best ideas. Once you have the best ideas, you’d figure out how to act on them, hopefully in a way that engages and/or recognizes the people that contributed to each idea in the first place. In a large organization, you need to do the same thing, but in a scalable way. Management might issue a company-wide “challenge” in a given area, say customer service, and listen to what employees have to say. Scaling this can be done any number of ways, such as through the management hierarchy or perhaps by crowd-sourcing ideas through an internal social web site. More on this later.

What about bottom-up innovation? How do you get people to innovate broadly as part of their job? How do you capture ideas and vet them? And how do you take action on the best ideas, engaging and/or recognizing the people who came up with the suggestion to begin with? Like directed innovation, in a small organization, you’d ask everyone for their suggestions. Or you might establish a company-wide guideline, as Google used to, that everyone can spend up to X% of their time on a project of their choosing. But allowing everyone to spend time on a project of their own choosing is pretty open ended. On one hand, that’s the point: everyone should believe that innovation is part of their job. On the other hand, with bottom-up innovation, you have the problem, not just of scale, but also of allowing of creativity to occur freely, while maintaining a degree of control over how much time is invested in it, and which ideas are acted on.

Approaches

Both directed and bottom-up innovation have the same intrinsic steps: communication, idea generation, vetting, and action. Issues of scale and level of investment come into play in both directed and bottom-up innovation. As there isn’t a formula for addressing the steps, I’ll describe some things that I have seen work, and that are generally applicable to many organizations.

Since ideas can come from anywhere, the challenge with communication and idea generation is how to encourage creativity, including how to reward people for coming up with good ideas even in areas that are outside of their day-to-day responsibility, and how to capture those ideas. The first step is communication: letting people know what you’re looking for. If line management has the right mind-set, they are your best advocates. If an employee’s idea is something that he or she can act on unilaterally, or with support from line management, they should. The message is that innovation can be stimulated simply by giving people the message that they are empowered to take action, rather than waiting for direction.

Focusing a bit more on idea generation, in some cases, for example in an area that cuts across functional units or if line management is part of the problem, you may want to create new channels of communication that don’t depend on line management. For example, the CTO or someone designated by the CTO could convene a set of skip-level sessions for brainstorming, with participation either at random, or by having people self-select to participate. Another approach to generating ideas outside of functional areas is to convene a group of top individual contributors from different parts of the organization in an Advisory Council. This group can be given a mandate to produce its own recommendations outside of the normal chain of command. As mentioned above, another approach that can capture valuable ideas in very large company is to create a social networking web site for crowd-sourcing ideas. This web site can be used to issue management “challenges” to focus attention on specific problem domains.

Once you have a set of ideas that go beyond an individual manager’s purview – about a specific problem (directed innovation) or more generally (bottoms up innovation) — they need to be vetted. Someone needs to decide which ones to invest in further and which ones to drop. In some cases, the ideas may need to be developed before they are ready to withstand the vetting process. Depending on his or her expertise, the innovator may need help fleshing out some parts of the idea. In a large company, it could make sense to have a small, dedicated team available to innovators to help them put together their “idea pitch.” The final decision on which ideas to pursue should be made by senior leadership. Getting buy-in from the CTO and CMO is a good indication that an idea may have legs. If the process you use gives innovators the opportunity to interact directly with the CTO and CMO, independent of line management, this creates its own incentive for people to participate. Most people don’t get an opportunity to pitch an idea to the CTO or CMO on a regular basis. When given the opportunity, people rise to the challenge.

The point of the selection process is to select ideas for further investment. Up until this point, the innovator(s) have been working on this in their spare time, so the resource investment has been relatively modest. The next step in a tech company might be to go from Powerpoint to prototype. Once you get down to building a prototype, the project may need additional resources, and a project team may need to be created.

The expectation should be that members of the project team can dedicate a significant portion of their time to the project. If an innovator and their management agree that the innovator can reduce his or her hours on day-to-day responsibilities without giving up that job, it may create a rotation opportunity to train someone else in that position, while the innovator is spinning up the project. Alternatively, if the project is a larger undertaking and leadership is clear that the project direction is sound, it can be operated as an internal start-up, where staff is transferred into a new organization. However, I think it’s best to view innovation projects as experiments, with a small initial investment, before turning them into mainstream development projects. This allows the project team to be nimble and to learn by doing, before the technical and business direction is set. It also controls the investment ramp.

Project teams should set clear objectives and there should be a regular cadence for reviewing status with leadership. The investment may be relatively small in the first round of a project. One can view the first phase of funding as seed funding from a venture capital firm. At the end of each round, the innovator(s) need to come back to leadership to request more funding, and permission to move forward with the project. Each decision point is an opportunity to tweak the direction the project is taking, or to cancel the project.

It’s also important, regardless of the process you use, that innovators get good feedback about their idea, and thanked for their suggestions. Not every idea will be adopted. Idea selection must be done in a way that is fair and is perceived as such. For ideas that don’t make the cut, the rationale for rejection should be clearly articulated, so that rejection doesn’t create disincentives to future participation in the process.

Additional Things to Consider

The discussion above does not address gaps in expertise that exist in the organization, which may make it difficult to get disruptive innovation. You can’t create in an area you don’t understand. If there are areas that are important to the evolution of your business, you may need to hire some people in that area. In the CTO organization, you might create an advanced technology group responsible for these emerging areas. A partnership with another company can also be a valuable strategy, though this note focuses specifically on internal innovation.

Depending on the size and culture of the organization, it may be appropriate to give someone responsibility for spearheading innovation. You need to pick someone with the right mindset, technical and inter-personal skills. In a culture that is resistant to change, the CEO or CTO needs to give this person a certain amount of moral authority. However, there are risks to codifying innovation in a particular position. Innovation is everyone’s responsibility: you don’t want to make someone into a gate-keeper or elevate their role at the expense of the broader organization.

Deciding what behaviors and outcomes are desired is important. People will respond to management direction. To the extent that management doesn’t know what it wants, or is prone to suggesting a lot of unfiltered ideas that people feel like they have to pursue, it can stimulate a great deal of uncertainty and wasted effort. This does no one any good.

Despite the challenges, however, I believe that old dogs can learn new tricks. Companies can reinvigorate themselves and improve their competitive position by stimulating internal creativity and innovation. To paraphrase an old African proverb: “When there is no enemy within, the enemy outside cannot hurt you.”

This note brings together the accumulated wisdom of a lot of people. I hope that others find it useful.